Payroll — Salary Processing with PF, ESI, and Professional Tax

Prerequisites: Module 25 — Final Accounts

Learning Objectives

By the end of this module, you will be able to:

• Explain the structure of a salary (components and deductions)
• Calculate PF, ESI, and Professional Tax for each employee
• Record the complete payroll journal entries
• Set up and process payroll in Tally Prime's Payroll module

Salary Structure Basics

Gross Salary
  − Employee PF Deduction   (12% of Basic)
  − Employee ESI Deduction  (0.75% of Gross — if applicable)
  − Professional Tax        (slab-based)
  ───────────────────────────────────────
= Net Pay (take-home)

Additionally, the employer contributes their share of PF and ESI — an additional cost to the company beyond the gross salary.

PF / ESI / PT Computation Flow

Employee
  │
  ├─ Gross Salary
  │     │
  │     ├─ Basic = 60% of Gross
  │     │     └─ Employee PF = 12% of Basic ──────────────────┐
  │     │                                                      │
  │     ├─ ESI check: Gross ≤ ₹21,000?                        │  To EPFO
  │     │     YES → Employee ESI = 0.75% of Gross ────────────┤
  │     │     NO  → ESI = ₹0                                  │
  │     │                                                      │
  │     └─ PT slab (Telangana):                               │
  │           > ₹20,000 → ₹200                                │
  │           ₹15,001–₹20,000 → ₹150    → To State Govt      │
  │           ≤ ₹15,000 → ₹0                                  │
  │                                                            │
  └─ Net Pay = Gross − PF(EE) − ESI(EE) − PT                  │
                                                               │
Employer                                                       │
  ├─ Employer PF = 12% of Basic ─────────────────────────────→┘ (Total PF to EPFO)
  └─ Employer ESI = 3.25% of Gross (if applicable) ──→ To ESIC

The Three Statutory Deductions

1. Provident Fund (PF) — EPF

2. Employees' State Insurance (ESI)

3. Professional Tax (PT) — Telangana

Sunrise Retail — April 2025 Payroll

Employee Eligibility Matrix

*₹12,000 falls below ₹15,000 slab — PT = ₹0. Earlier drafts used ₹100 as a nominal; correct Telangana slab is ₹0.

Individual Payslip Calculations

Kiran Sharma — MD

Sneha Reddy — Director, Finance

Ramesh Kumar — Accounts Staff

Priya Singh — Sales Staff

Suresh Babu — Operations Staff

Summary Payroll Statement — April 2025

Employer Contributions

Journal Entries — April 2025 Payroll

Entry 1: Gross Salary Expense and Deductions

Entry 2: Employer PF and ESI Contribution

Entry 3: Net Salary Payment via Bank

Entry 4: Remitting PF to EPFO

Employee PF: ₹10,800 | Employer PF: ₹10,800 | Total PF to EPFO: ₹21,600 (due May 15)

Entry 5: Remitting ESI and PT

Total ESI: Employee ₹225 + Employer ₹975 = ₹1,200 | Total PT: ₹750

Total Payroll Cost to Sunrise Retail — April 2025

The P&L shows ₹1,50,000 as "Salary" and ₹11,775 as "PF/ESI Contribution" (separate expense lines).

Setting Up Payroll in Tally Prime

Step 1: Enable Payroll

Gateway → F11 (Features) → Payroll Features
→ Maintain Payroll: Yes
→ Maintain Cost Centre for Payroll: Yes

Step 2: Create Pay Heads

Gateway → Masters → Payroll → Pay Heads → Create

Step 3: Create Employee Masters

Gateway → Masters → Payroll → Employees → Create

Set: Name, Department (Cost Centre), Date of joining, PAN, Bank account, PF applicable: Yes/No, ESI applicable: Yes/No.

Step 4: Process Payroll — April 2025

Gateway → Payroll Vouchers → Payroll Voucher (Ctrl+F4)
Date: 25-Apr-2025
Payroll Period: 01-Apr-2025 to 30-Apr-2025

Select all employees. Tally calculates all deductions automatically. Press Ctrl+A to record. All 5 journal entries are generated from the payroll voucher.

Filing PF and ESI — Portals and ECR

EPFO — ECR Filing (Monthly, due 15th)

Portal: unifiedportal-mem.epfindia.gov.in

Steps: Login with Establishment ID → Download ECR CSV template → Fill employee-wise wages → Upload → Get TRRN → Pay via net banking by 15th.

Employer's 12% split:

• 3.67% → Employee Provident Fund (EPF) account
• 8.33% → Employee Pension Scheme (EPS) — capped on ₹15,000 wages

Sunrise Retail April PF outflow: Employee PF ₹10,800 + Employer EPF + EDLI + admin ≈ ₹23,400 total.

ESIC — Return Filing

Portal: esic.gov.in

Contributions paid monthly by 15th. Half-yearly returns (Form 5) due November 11 (Apr–Sep period) and May 11 (Oct–Mar period).

Practice Exercise

Exercise 1: In June 2025, Ramesh gets a raise to ₹28,000/month. Recalculate his PF, ESI eligibility, and PT.

Exercise 2: Sunrise Retail hires Kavya (new sales executive) at ₹17,500/month from May 1. Is she ESI eligible? Calculate her complete deductions and net pay.

Pay Heads Beyond Statutory

PF, ESI, and PT are mandatory deductions — but real-world Indian payroll has at least four more pay heads that show up every month. None are statutory, but skipping them in your Tally setup means manual journal entries every payroll cycle.

1. Overtime — As a Production Type (not Attendance Type)

Overtime is hours worked beyond the standard working day, paid at a per-hour rate. In Tally, overtime is configured as a Production Type pay head — separate from attendance — because it computes on quantity (hours) × rate, not on monthly presence.

Configuration logic:

• Pay Head Type: Earnings for Employees
• Calculation Type: On Production / Quantity
• Production Type: Overtime Hours (a new Attendance/Production master)
• Rate: per-hour rate (varies by employee)

Sunrise Retail example — Suresh Babu (Operations):

Suresh's regular monthly gross is ₹12,000 for 26 working days. In April, he works 25 overtime hours at a rate of ₹120/hour to handle the month-end purchase receipt rush.

Overtime hours       : 25
Rate                 : ₹120/hour
Overtime earnings    : 25 × ₹120 = ₹3,000

Suresh's revised April gross: ₹12,000 + ₹3,000 = ₹15,000

His PF, ESI, and PT recompute on the new gross — ESI still applies (₹15,000 ≤ ₹21,000), PT moves to the ₹0 slab still (₹15,000 ≤ ₹15,000).

2. Bank Loan EMI — Recurring Deduction (LOP-style)

When an employee takes a personal loan from the company (or a salary advance is structured as a recurring deduction), the monthly EMI is a fixed-amount deduction from gross — just like a Loss-of-Pay entry in structure, but for a fixed rupee value, not a day-count.

Configuration logic:

• Pay Head Type: Loans and Advances
• Calculation Type: Flat Rate (or As Specified during voucher entry)
• Affect Net Salary: Yes (reduces take-home)
• Track outstanding balance via a Loan Master per employee

Sunrise Retail example — Ramesh Kumar (Accountant):

In March 2025, Sunrise Retail advanced Ramesh ₹50,000 against future salary, repayable over 10 months at ₹5,000/month starting April. April payslip looks like:

The loan ledger ("Ramesh — Salary Advance Recoverable" under Loans & Advances (Asset)) reduces by ₹5,000 each month. After 10 months, the balance is zero.

Journal entry impact:

3. Advance Recovery (One-Off, Non-Recurring)

Different from a structured loan — an Advance Recovery is a one-time pull-back of an earlier ad-hoc advance. Pay Head Type: Deductions from Employees, Calculation Type: As Specified. Used when, say, Suresh got ₹2,000 cash advance on April 15 against April salary and the company recovers it from his April 30 payslip in one go.

4. Bonus

Festive or performance bonus — paid alongside regular salary in specific months. Configured as:

• Pay Head Type: Earnings for Employees
• Calculation Type: Flat Rate (or As Computed Value if linked to formula like "1 month's Basic")
• Statutory: Bonus is taxable under salary income; PF applies if the bonus is paid in lieu of salary; the Payment of Bonus Act mandates a minimum 8.33% bonus for eligible employees in covered establishments

Diwali Bonus 2025 — Sunrise Retail planned payout:

Posted in October payroll as an additional earnings line — PF, PT recompute on the elevated gross for that month.

Key Terms

Module Summary

• Gross Salary − Employee Deductions (PF + ESI + PT) = Net Pay
• PF: 12% employee + 12% employer on Basic (60% of Gross) — applies to all Sunrise Retail employees
• ESI: 0.75% employee + 3.25% employer on Gross — only Priya (₹18,000) and Suresh (₹12,000) qualify
• Professional Tax: Telangana slabs — ₹200 for >₹20,000, ₹150 for ₹15,001-20,000, ₹0 for ≤₹15,000
• Five journal entries cover the full payroll cycle: salary accrual → employer contributions → net pay → PF remittance → ESI/PT remittance
• Sunrise Retail's April total employment cost: ₹1,61,775 (₹1,50,000 gross + ₹11,775 employer contributions)

Quick Quiz

1. Suresh Babu (₹12,000/month) is ESI eligible because:
   • a) His salary is exactly ₹12,000 — the minimum
   • b) His salary is ≤ ₹21,000 — the ESI income threshold
   • c) All employees are ESI eligible regardless of salary
   • d) Suresh is in Operations — that department is always ESI covered

2. Employer PF contribution for Priya Singh (Basic ₹10,800):
   • a) ₹135 (same as ESI)
   • b) ₹1,296
   • c) ₹810
   • d) ₹2,160

3. The Salary A/c is debited with:
   • a) Net Pay only (₹1,38,225)
   • b) Gross Salary only, separately from deductions
   • c) Gross Salary (₹1,50,000) — deductions are credited to respective payable accounts
   • d) Employer contributions only

4. PF and ESI must be remitted to EPFO/ESIC by:
   • a) The last day of the same month
   • b) The 15th of the following month
   • c) The 7th of the following month
   • d) Quarterly — once every 3 months

You've completed Core Accounting. Continue with GST Mastery or Tally Prime Complete.